A mortgage is a traditional financial product that allows a person or persons to finance or re-finance the purchase of a home. At least two other traditional financial products allow a home owner to obtain funds by mortgaging the value of his or her existing home, or at least the equity in the home. A home equity loan can be obtained from a financial institution by the home owner, who may be referred to by the financial institution as a “customer” or “borrower.” The customer takes out the loan and a lien is placed on the home by the financial institution so that the loan is secured by the equity in the home. As with a mortgage, the borrower makes payments with interest to the financial institution for the life of the loan. The loan may be taken out as a lump sum, or may be set up as a line of credit, where the borrower draws on the line as money is needed. In the case of the line of credit, monthly payments are adjusted accordingly for the outstanding balance at any given time. The amount of the loan, or the size of the line of credit is calculated as a percentage of the value of the equity in the borrower's home, and this percentage is commonly referred to as the loan-to-value (LTV) ratio or percentage, or simply as the “LTV.”
Another vehicle, the reverse mortgage (RM), allows a borrower to draw upon the equity in his or her home without having to make any payments until the loan is terminated. A reverse mortgage product offered by a financial institution is sometimes referred to as an “equity release product” and such a loan is sometimes referred to as an “equity release loan.” Typically, a reverse mortgage is set up as a line of credit which is again calculated as a percentage of the value of the borrower's home, the LTV.
A reverse mortgage can be terminated by the death of all borrowers, sale of the home, non-residence of all borrowers for a period of 12 months, violation of home upkeep standards, or failure to pay insurance or taxes. Although with some equity release products borrowers may choose to make partial or full repayments of a reverse mortgage loan, in the typical case, no payments are made, and the lending institution obtains the minimum of the net sale proceeds of the property and the loan balance as “repayment” of the loan upon the death of the last of the borrowers, since reverse mortgages are typically non-recourse loans. Thus, underwriting criteria are based primarily on the property itself and not on the credit worthiness of the borrower(s). However, a minimum age requirement for the borrowers is typically imposed. Examples of specific, known reverse mortgage products include the Home Equity Conversion Mortgage (HECM) product insured by the United States Federal Housing Administration (FHA), and Fannie Mae's Home Keeper.